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SUMMARY
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1.(S) Since the Hamas takeover, Israel has designated Gaza
as a &hostile entity," and maintained an economic embargo
against the territory. Under this designation, decisions on
shekels in circulation in Gaza and the territory's economy in
general are treated by the GOI as security matters, and
therefore are subject to the same high levesl of uncertainty
that the GOI uses to keep potential sources of security
threat off-balance. Israeli officials have confirmed to
Embassy officials on multiple occasions that they intend to
keep the Gazan economy functioning at the lowest level
possible consistent with avoiding a humanitarian crisis. The
Palestinian Authority's request for a guaranteed "floor"
transfer rate of NIS 100 million per month will not be
seriously considered by the GOI until after January 2009,
when the Palestinian political situation becomes more clear.
In any case, given the size of the population and economy in
Gaza, GOI interlocutors find it implausible that the number
of workers on the Palestinian Authority,s (PA) payroll there
and the amount of money to be paid each month accurately
reflect the current size of the territory,s civil service or
its future government service requirements, nor do they agree
with the PA's contention that these payments are buying
loyalty. Furthermore, GOI officials doubt the effectiveness
and authority of the Palestinian Monetary Authority (PMA) to
regulate and police banks in Gaza. Israeli officials reject
the PA,s argument that denying banks the liquidity to pay PA
salaries in full bolsters the Hamas regime. While some
acknowledge the gains to Hamas from a weakened formal banking
sector in Gaza, they argue that such gains are small relative
to the cost of giving Hamas greater access to shekels or the
economic benefits they bring to Gazans. A USG policy that
encourages the GOI to review its present policies (as
requested by the Office of the Quartet Representative and the
PA) while pressing the Israelis to approve as much funding
each month as possible under security constraints, assisting
the PA to improve its regulatory regimes and due diligence
procedures, and continuing to foster direct dialogue between
officials of the GOI and PA on Gaza issues in the monthly
Joint Economic Commission meetings is our best bet for
minimizing economic/political gains to Hamas in Gaza.
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GAZA IS A HOSTILE ENTITY
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2.(C) While the GOI believes that maintaining the shekel as
the currency of the Palestinian Territories is in Israel,s
interests, it treats decisions regarding the amount of
shekels in circulation in Gaza as a security matter.
Requests by Palestinian banks to transfer shekels into Gaza
are ultimately approved, partially approved, or denied by the
National Security Council (NSC), an organ of the Israeli
security establishment, not by the Bank of Israel (BOI). As
part of their overall embargo plan against Gaza, Israeli
officials have confirmed to econoffs on multiple occasions
that they intend to keep the Gazan economy on the brink of
collapse without quite pushing it over the edge (see reftel
&D8). The PA's request to set an NIS 100 million floor on
monthly transfers to Gaza is being looked at, but no action
will be taken until after January 2009, when the
Palestinians' political situation becomes more clear.
Complicating the Gaza issue, and Palestinian banking as a
whole, is Bank Hapoalim,s recent decision to terminate its
correspondent banking relationship with the Palestinian
banking sector (see reftel &C8). Hapoalim remains
determined to stand by its objective to sever ties on
November 30, though observers have their doubts that Hapoalim
will follow through on the initiative (septel).
3.(SBU) The GOI's monetary policy towards Gaza is consistent
with its declaration that Gaza is a "hostile entity." Some
observers have told Emboffs that political pressure arising
from the issue of captured Israeli soldier, Gilad Shalit, may
have influenced high-level Israeli officials to tighten their
stance on monetary policy (see ref &A8). However, this has
not been raised or confirmed by any high-level GOI contacts.
The GOI position on cash to Gaza has remained negative since
the Knesset's declaration that it was a hostile entity.
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THE PAYROLL DILEMMA: WHO IS ACTUALLY RECEIVING PA PAYCHECKS
IN HAMAS-CONTROLLED GAZA?
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4.(S) The PA contends that Hamas, ability to pay its
workers, salaries each month combined with the inability of
the PA to do so causes further deterioration in support for
PA/Fatah relative to Hamas (reftel &I8). The GOI, on the
other hand, believes that many of the estimated 77,000 wage
earners on the PA's payroll may actually be Hamas members or
affiliates. Israeli security analysts argue that a
considerable portion of the civil service salaries that the
PA attempts to pay each month to its Gazan employees actually
find their way to Hamas or Hamas supporters (see reftel "D").
They have therefore determined that full coverage of the
payroll is contrary to Israel,s security interests, even if
Hamas gains some political advantage from being able to pay
its salaries in full. Whether money finds its way into the
territory by means of the PA payroll or the Hamas payroll,
says the GOI, Hamas experiences a net increase in its
funding. Israeli analysis suggests that it is best to deny
the terrorist regime a larger pool of funds in Gaza, no
matter the origin, preferring to minimize Hamas, ability to
purchase weapons or equipment for use against Israeli
civilians. Thus, they reject the PA,s argument that denying
banks the liquidity to pay PA salaries in full bolsters the
Hamas regime (see reftel &I8).
5.(S) Furthermore, GOI officials, while often praising the
credentials of PA technocrats, doubt the effectiveness and
authority of the Palestinian Monetary Authority (PMA) to
regulate and police Palestinian, and especially Gazan banks.
This double standard in the treatment of Gaza and the West
Bank by the GOI is yet another example of how Gaza is
becoming increasingly isolated from the West Bank, despite
the best efforts of the PA/Fatah to maintain unity. These
issues come to the fore at the end of every month when the PA
tries to make payment to its &employees8 in Gaza.
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HOW MUCH MONEY DOES GAZA ACTUALLY HAVE?
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6.(S) Observers speculate as to the amount of shekels
circulating in Gaza. The BOI has established a history of
routinely approving all requests from the Palestinian banks
to exchange spoiled shekel notes from Gaza for new notes.
This is not a security issue as it does not increase the
total number of shekels in circulation. In order to support
a minimal level of commerce and provide for minimal
necessities such as food, utilities, and medical supplies,
analysts agree that there must also be a certain outflow of
cash from the territory to Israel, the West Bank, or other
countries. The September 11, 2008 report of the
International Crisis Group Middle East Briefing estimates
this outflow as 30 percent of Gaza,s total shekel holdings
each month. Unfortunately, since Gaza tends more and more
towards a cash economy based upon movement of goods through
its tunnels to the Sinai, it becomes increasingly difficult
to estimate this amount with accuracy. Udi Levi (strictly
protect), a high-ranking official in the Israeli security
establishment, commented to Econcouns in October that at
least 1.8 billion shekels are currently unaccounted for in
Gaza.
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WHO APPROVES THE INTRODUCTION OF NEW CASH TO GAZA?
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7.(C) The NSC, an organ of the Israeli security and
intelligence community, ultimately has the final say in
permitting new liquidity into Gaza. When the PA or a
Palestinian commercial bank ask to move shekel bank notes
into Gaza, the request is usually submitted to the BOI. The
BOI defers to the NSC though it may act in an advisory
capacity to inform the NSC on the state of the Gazan economy
or possible consequences of action or failure to act. When
the NSC ultimately approves a particular amount, the IDF
routinely permits the cash to enter Gaza. In determining how
much new liquidity can enter Gaza at any given time, the NSC
considers several factors, including the humanitarian
situation in the territory. The NSC abides by the principal
that Gaza should receive just enough money for the basic
needs of the population but it is not interested in returning
the Gazan economy to a state of normal commerce and business.
The agency tries to approve a reasonable amount of new money
for entry into the territory each month; however, it will not
permit any large scale transfer of assets from Ramallah-based
banks to their branches in Gaza for fear of improving the
purchasing power of entities wishing to harm Israel. NSC
officials have been unable to advise econoffs of any
particular formula used in arriving at a figure, but the
fluid state of Gazan, PA, and Israeli politics make it
difficult to anticipate factors that might have a bearing on
the decision from month to month.
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SO WHAT SHOULD THE USG DO?
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8.(S) Embassy Tel Aviv has encouraged the GOI to review its
policy on Gaza liquidity, as requested by the Office of the
Quartet Representative and the PA. As noted above, we do not
expect that review to result in any changes until the
political situation between Hamas and Fatah becomes more
clear, presumably after January 9, 2009. In the meantime, we
believe the USG should continue to encourage the Israelis to
approve as much funding as possible each month, consistent
with our mutual political/security objectives in Gaza. We
should continue to assist the PA to improve its regulatory
regimes and due diligence. Finally, the USG should continue
to promote use of the Israeli-Palestinian Joint Economic
Committee as the appropriate venue for resolving Gaza
liquidity issues.
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CUNNINGHAM